RETURN TO THE SOURCES

A chain of filling stations, oil refining capacities and pipelines are not what provides a firm with the status of an oil company. Its own oil and gas extracting operation is what it needs to reach the heights of this business. In order to acquire the status of an international oil company, a firm needs to develop oil and gas fields abroad. Over the past five years, SOCAR (the State Oil Company of Azerbaijan) has actively been making investments abroad. These include opening chains of filling stations in Georgia, Ukraine, Switzerland and Romania, the purchase of the Petkim petrochemical complex in Turkey with prospects for constructing an oil refinery, a port and a power station, the purchase of gas distribution networks in Georgia, oil reservoirs in the countries of South-east Asia and so forth.

The same can be said of the company's activity in Azerbaijan; it is actively conducting prospecting, increasing gas production, has managed to stabilise oil extraction, and has set up and extended a chain of filling stations. The company plans to commission a large state-of-the-art complex by 2020-23, in which a gas processing works, an oil refinery and a petrochemical works will be concentrated.

SOCAR's status, the existence of promising projects together with the high assessment of Azerbaijan's economic development by international economic and ratings organisations mean that there are few impediments to attracting capital investments on the financial markets.

So, the company has entered that stage in its development, when it needs to have oil and gas fields abroad in order to rise to a qualitatively new level; this will allow SOCAR to quite rightly call itself an international oil and gas company.

In order to shift to this stage in its development, SOCAR has decided to begin collaborating with the Russian "Rosneft" company, the largest oil-producing company in the world.

The recently concluded agreement between the two companies on creating a joint enterprise envisages wide-ranging mutually beneficial co-operation.

First and foremost, SOCAR is interested in projects relating to the development of Russian oil fields where it is difficult to extract the oil reserves.   

"There are many oil fields in Russia, currently not being developed, where it is difficult to extract the oil reserves. There may be billions of tonnes of oil in these reserves. We have the expertise and a skilled team to tackle these projects. On the whole, there is much that is promising and many possibilities in Russia," SOCAR president [CEO] Rovnaq Abdullayev stated.

Besides this, the parties are interested in joint infrastructure projects, including supplying "Rosneft's" oil along the Baku-Novorossiysk pipeline and possibly refining it at Baku's oil refineries or transporting it along the Baku-Tbilisi-Ceyhan pipeline.

For SOCAR, as a dynamically growing company, boosting reserves anywhere in the world is a priority task. The company is prepared to make investments in capital-intensive projects to produce oil in Siberia, which is difficult to extract.

For Azerbaini oilmen this will be the continuation of many-year-long co-operation. The huge and defining contribution made by Azerbaijani oilmen to the prospecting and development of the Siberian oil fields is no secret to anyone. It is sufficient to recall the names of the Heroes of Socialist Labour, Farman Salmanov and the gas industry minister of the USSR, Sabit Orucev.

Whereas it is quite understandable why SOCAR should want to co-operate with the biggest oil company in the world, the question remains as to why "Rosneft" should be attracted to the Azerbaijani company which is not large on an international scale? 

The main factor here is Azerbaijani gas, to which all Europe's hopes for diversification of energy supplies are connected at the given stage. As already stated, "Rosneft" is showing interest in the first stage of developing the "Absheron" [Abseron] gas field which has reserves of no less than 350bn cu m and also in conducting prospecting work in other promising structures.

According to the results for 2013, the Russian company was the third biggest gas producer in the Russian Federation with an output of 38bn cu m. But the company is unable to independently export the gas it produces, since this area is monopolised by "Gazprom". Repeated attempts by "Rosneft" to break that monopoly have for the moment failed; the only thing that the company has managed to achieve was gaining the right to export liquefied gas.

In the opinion of a senior analyst at the Russian AVG Capital Partners, Yelena Yushkova, "Rosneft's" involvement in the Azerbaijani gas projects is opening up extensive possibilities for the Russian company to access the European gas market.

"Today Europe is completely dependent on supplies of Russian gas; therefore the development of the gas fields in Azerbaijan is attractive to European consumers, because it is an alternative to "Gazprom". But, if Azerbaijani gas is produced with the involvement of a Russian company, then that will be advantageous both to Russia and Azerbaijan since it will help to avoid the politically-aimed dumping prices," Ye. Yushkova told Regionplus. "Rosneft's" interest will not thereby be limited solely to gas projects.

 Besides producing gas, "Rosneft" is interested in diversifying oil production as well as in seeking new ways to supply oil and gas for export. Azerbaijani oil is of a high quality, and there is a stable demand for it in Europe. There are moreover various ways of transporting oil to the European markets from Azerbaijan, which makes the logistics of transportation relatively cheap and ensures reliable supplies to the consumers, the analyst thinks.

On the whole, this agreement between "Rosneft" and SOCAR may become one of the weighty building blocks in the foundation of developing mutually advantageous co-operation  between Azerbaijan and Russia, both from an economic and political point of view, and will serve to guarantee a stable situation in Caspian region, Ye. Yushkova noted.

At the present level in its development SOCAR is well able, both financially and with its technical expertise, to tackle projects abroad. But at SOCAR they are taking into account both the company's possibilities and the risks, in connection with the fact that they prefer co-operation with major players on the oil and gas market. Besides, "Rosneft" is only the first example of such co-operation, and SOCAR has offers from well-known Western companies as well. "The extent of this co-operation is being worked out for the moment and is limited. We are for all that a small company on a world scale. We have an excellent knowledge of our own region. In other regions, not only commercial and technical risks can occur, but also political ones. We need to make a serious assessment here," SOCAR reported to Regionplus. 

Vietnam is also interested in co-operating with SOCAR in extracting oil and gas resources. 

"Proceeding from historical experience, the Vietnamese have made approaches and offers to us. They are offering us an opportunity to join their oil-producing market. These are offshore (sea) projects. Even if these projects are expensive ones, the cost of extracting oil at sea is very low and the returns are excellent. All the more so since this is a new area; offshore oil extraction has been actively developed in Vietnam over the past decade," they reported at SOCAR.

This does not mean that the company is in any way limiting its plans and prospects for developing oil fields in Azerbaijan; foreign companies are increasingly being offered opportunities to become involved in this process.

Thus the Norwegian company Statoil is showing interest in developing the "Asrafi" and "Karabakh" ["Qarabag"] offshore deposits, Vaqif Aliyev, the head of SOCAR's investment department, reported.

At the end of the 1990s these oil fields were developed by individual consortiums of foreign companies within the framework of PSA contracts, but, at the end of the prospecting work, development of the oil fields was deemed unadvisable.

"We are currently conducting joint studies with the Statoil company at the "Karabakh" and "Asrafi" oil fields, in connection with the possible signing of an agreement in the future regarding the main commercial principles," V. Aliyev noted.

He stressed that SOCAR had always found these oil fields attractive, since, "although the reserves are not large, they are important to us because they could easily be extracted".  V. Aliyev also reported that SOCAR and Statoil are continuing work within the memorandum of mutual understanding on the prospecting and development of the Zafar-Masal structures.. 

Moreover, in spite of its involvement in developing such major oil fields as "Azeri-Chirag-Guneshli" [Azari-Ciraq-Gunasli; ACG] and "Shah Deniz" [Sah Daniz], the British company BP is continuing to be just as active in Azerbaijan. The company has come to an agreement with SOCAR on conducting comprehensive prospecting aimed at finding oil and gas deposits in the shallow waters around the Abseron peninsula.

SOCAR's vice president, Xosbaxt Yusifzada, has said that "for four years now BP has been trying to get permission from us to prospect for oil in the shallow waters of the Caspian. The relevant agreement has at last been signed this year."

It would appear that some progress has been achieved in developing the deep-lying gas-bearing strata in the Azeri-Chirag-Guneshli block, which have reserves of 300bn cu m of gas, but are not covered by the existing contract on developing the site.

SOCAR has tried to start extracting gas from these strata within the framework of an individual contract, but these attempts threw up a number of unresolvable problems.

"At the present time, we are not looking at this issue from the point of view of a separate contract. After lengthy discussions, we came round to the view that concluding a separate agreement on developing these strata within a territory covered by a single contract would bring about certain irresolvable issues. It is therefore most likely that we will examine it within the single context of developing the "Azeri-Chirag-Guneshli" gas field," the SOCAR representative noted.

He also stated that the company, together with BP and other partners in the "Azeri-Chirag-Guneshli" project, are discussing a long-term programme for extracting gas from the strata, which would provide for maximum extraction of the hydrocarbon resources in the block.

It is in the interests of the state and SOCAR to extract the maximum volumes of oil and gas from the "Azeri-Chirag-Guneshli" oil and gas fields. This does moreover apply both to the oil and to the gas in the deep-lying and the surface strata. Discussions are currently under way regarding a concept for achieving this extraction and the technical solutions that can be employed to this," he noted.

SOCAR also intends to attract a serious foreign partner into developing the "Umud-Babak" offshore block. Extraction has moreover started at the "Umud" field which has reserves of 200bn cu m, but up until now only by the efforts of SOCAR itself. But a number of companies have shown interest in becoming involved in this project, as well as in prospecting work on the promising "Babak" structure.

Most of today's major oil companies started out on their path to the top of the business at the turn of the 19th and 20th centuries. These are ExxonMobil, BP, Royal Dutch Shell, Total and others. SOCAR will have every opportunity to join this group in the next few decades.